What Exactly is a Free Market?
What do we mean by “free markets” or even “capitalism” for that matter? It’s probably not what you think. For many people, these terms conjure images of Wall Street bankers and multinational corporations. Perhaps they also bring to mind small businesses and scrappy startups. All of those are part of free market capitalism, but they’re only one piece of the puzzle.
To understand the whole picture, you need to start with a single individual.
Start with yourself. You have hopes and dreams, talents and passions. You want to build a life that brings you and the ones you love happiness and excitement even as you achieve independence and stability. Ultimately, you want to build a life with meaning, filled with purpose. Everyone of us wants that for ourselves. And for each one of us, that life looks as unique and diverse as we all are. For all the things we share as a community and a society, there is no getting around the fact that each of us values different things at different times in different ways. One person’s trash is another person’s treasure. No one can know you as well as you know yourself. The same is true for every one of us.
So here you are, a unique individual, out in the world trying to figure out life. Doing it the “free market” way means following three pretty simple rules.
Those are the rules of the free market: so long as you don’t hurt other people or steal their stuff, and so long as you keep your word, you’re free to do whatever you want. You’re free to work for whoever you want. You’re free to love and marry whoever you want. You’re free to worship whoever or whatever you want. You’re free to trade with whoever you want.
And with this freedom, you’re empowered to take on any problem you want to. Free markets destroy the problems in our society because they empower free people to destroy those problems and offer new solutions. Free markets empower everyone, but especially underdogs, upstarts and immigrants to take on the status quo precisely because they don’t need to seek permission first. Free markets don’t respect traditions unless those traditions are maintained peacefully. Free markets are the most radical, revolutionary force for change humanity has ever discovered. And the reason is simple. Free markets are nothing more and nothing less than each of us and all of us having the right to try our best at improving everything for each other.
Most people agree that markets are great at making stuff. Hiking boots, bicycle helmets, electric cars and iPads—nearly all the products that make our lives safer, easier, and more fun are the result of market forces. And while it’s wonderful to have access to such amazing tools, even an innovation as revolutionary as the washing machine is still, on some level, just more stuff. If you’re at all skeptical about free markets, then it’s fair to ask if they can do more than fill up our stores and homes with toys. Can markets actually solve humanity's toughest problems?It’s hard to imagine a tougher and more persistent human problem than hunger. For thousands of years, hunger was the norm for most of the people on the planet, and even the richest kings and sultans were vulnerable to famine.
But starting in the 1700s, everything changed thanks in part to one of the greatest innovations in human history—specialization. Specialization is the division of work into narrow, “specialized” niches. It’s the reason why you can put food on your table by cutting hair, or writing code for video games. And that’s the product of free markets.
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Without specialization, everyone needs to grow their own food, sew their own clothes, and build their own homes. Once we begin to specialize, workers and entrepreneurs can focus on specific tasks, like growing wheat. Their expertise allows them to produce a surplus, which they trade with clothes makers and home builders. Pretty quickly, everyone becomes better off. And because the farmer needs the builder and vice versa, they are more likely to treat each other with tolerance and respect.And as farmers specialized—one growing corn, another growing apples—they started to experiment with new tools and techniques: crop rotation, selective breeding, fertilization, and many more. Gradually, one innovation at a time, farmers managed to make their labor more efficient and more profitable.
From the time of the American Revolution to today, the per capita supply of calories in the West has gone up more than 70 percent. The picture is even more impressive when you zoom in on the poorest sections of society. Two-hundred years ago, the poorest 20% of individuals in England and France lacked the energy for sustained work. In other words, the poorest people—those who desperately needed opportunities —couldn’t work because they didn’t have enough to eat. That’s the very definition of a vicious circle.
Share of the World Population living in Absolute Poverty, 1820-2015
– by Max Roser
Share of the World Population living in Absolute Poverty, 1820-2015
– by Max Roser
Source: Bourguignon and Morrisson (2002) and World Bank (PovcalNet) (2015)
All incomes are adjusted for inflation over time and for price differences between countries (1985-PPP before 1970; 2011-PPP after 1970).
Of course, hunger is still a challenge for millions of people around the world, but the progress we have made in just a few hundred years is nothing short of astonishing. From 1800 to 2010 the price of wheat, humanity’s most ubiquitous staple food, fell more than 88%. During the same period, the share of the world’s population living in so-called “absolute poverty,” surviving in the shadow of starvation, has fallen from 94% to just 9.6%.
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